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Scrutiny of corporate behaviour is not waning

Scrutiny of investment manager behaviour continues

Investment managers face new rules to improve their culture, governance and behaviours, and more to come.


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Holding investment managers accountable for stewardship and tightening governance

Stewardship, corporate governance and fund governance are still in regulators’ cross-sights. While there is little standardisation of how corporate governance is defined and implemented, common emerging themes include a focus on named individuals and clarity of roles, and on risk and compliance functions. Fund governance receives special attention.

For example:

  • Japanese investment managers must strengthen governance and management of conflicts of interests arising from their relationships with affiliate companies. The Stewardship Code has been amended to encourage institutional investors to engage constructively with investee companies, in the best interest of ultimate beneficiaries. 
  • The UK regulator has drawn on behavioural economics to argue that firms’ compliance can be incentivised and reinforced by imposing more “salient and vivid” punishments for wrongdoing, introducing a stronger sense of individual morality in decision-making, and requiring stronger leadership based on effective challenge of poor behaviours and properly aligned remuneration. 
  • In Brazil, wide-ranging corporate governance changes have been enacted and investment management, fiduciary administration, compliance, risk management and shares distribution all require the designation of specific directors. There are, additionally, rules for responsibility of outsourcing of custody services, pricing handbooks, and the segregation of management and administration areas. 
  • The Central Bank of Ireland has set out three tenets of fund management company effectiveness – governance, compliance and supervisibility – and has introduced a number of rule changes and guidance to support these tenets.
KPMG regulatory readiness approach infographic

A range of other regulatory requirements are under close consideration

Prudential requirements, outsourcing, best execution and trade allocation, and payments for investment research are occupying different regulators around the globe, and some are focusing on specific types of entities, including wealth managers and distributors.

Requirements on firms to obtain best execution for client orders is under scrutiny at global and European level. IOSCO has examined the regulatory conduct requirements for firms to manage conflicts of interests associated with routing orders and obtaining best execution. ESMA had said that implementation of best execution provisions and the level of convergence of national supervisory practices were relatively low, but now says there have been improvements. The implementation of MiFID II will provide regulators a further opportunity to converge approaches.

Also within Europe, the new MiFID II rules on payment for investment research are causing both investment banks and investment managers concern about their ability to implement new operating models by end-2017. Managers must identify the cost of investment research separately from order execution costs, which will require detailed information from investment banks.

Meanwhile, in the US, the governance of the wealth management industry is under intense scrutiny by the SEC, FINRA and the Department of Labor. Wealth management firms must now carefully review their compliance departments, including governance, policies and procedures.

And elsewhere, domestic sales practices are in focus. In Mexico, for example, independent investment advisers were not previously regulated, but now need to be registered and comply with all sales regulation.

New rules demand resources, and more to come

The investment management industry is feeling the pressure to keep up with these regulatory changes. For example, in Europe, the implementation of MiFID II by January 2018 is absorbing significant senior management time, and people and systems resources of both firms and regulators.

Ultimately, while regulators are focusing on compliance with existing rules, investment management firms must have an eye to the growing pipeline of other legislative changes too. The many pieces of post-financial crisis legislation include review clauses, a number of which are timed to take place during the next three years.

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